Edelman plans ETF based on revolutionary technology

Well-known RIA partners with BlackRock's iShares division to invest in companies exposed to potentially paradigm-shifting technologies

Mar 23, 2015 @ 4:00 pm

By Trevor Hunnicutt

Imagine if your view of the investing world became an ETF. If you're Ric Edelman, it's happening.

BlackRock Inc., whose iShares division is the world's largest manager of exchange-traded funds, is launching a technology fund this week that it says was dreamed up by the well-known adviser.

The iShares Exponential Technologies ETF (XT) invests in companies exposed to potentially paradigm-shifting technologies, from robotics and 3-D printing to intensive data analysis. Those themes and companies will be selected and reevaluated at least annually by Morningstar Inc. analysts.

“This is the first time that we've worked so closely with a registered investment adviser,” said Hollie Fagan, who leads BlackRock's business with registered investment advisers.

Fund sponsors often use customer feedback to develop products. But XT is the rare example of an advisory firm that helped develop a concept and marketed it on behalf of a fund company without being compensated. Mr. Edelman's firm will likely invest hundreds of millions in the product on behalf of its clients.

Mr. Edelman, an index-investing advocate who founded his Fairfax, Va.-based firm in 1987, is the face of one of the nation's largest independent wealth-management franchises. Edelman Financial Services maintains 40 branches as well as an online offering.


Now, Mr. Edelman says he's also become a student of the technologies refashioning modern life. In 2012 he enrolled in an oversubscribed program, the Singularity University, which links top Silicon Valley technologists with corporate executives.

“It became apparent to me very quickly that exponential technologies are going to transform our planet, virtually every aspect of our lives, and in a surprisingly short amount of time,” said Mr. Edelman. “I discovered that our portfolios did not have the targeted exposure to exponential technologies that I believe are appropriate for today's investment-management strategy."

Mr. Edelman said the fund takes up where other technology-focused indexes are lacking. Those funds can be risky bets on one sector of the economy. XT, instead, will focus on a range of companies that could benefit from new innovation.

A fact sheet on the ETF from Morningstar, for instance, lists AstraZeneca PLC as one company poised to benefit from “bioinformatics,” the study of biological data; eBay Inc., whose PayPal unit is “helping to transform global commerce”; and Applied Materials Inc. for its investment in nanotechnology.

Google makes the list, but Yahoo does not: “Facebook and Google not only have broader reach, but they also have proprietary data about their users."

Yet for all the opinion-making on companies, this fund is not actively managed. Instead, XT represents the latest iteration on another innovation. “Strategy” indexes, which track rules-based investment strategies instead of markets, have been attracting a growing share of the money in ETFs.

Morningstar uses the work of its team of stock analysts to generate inputs for an index it licenses to BlackRock for the fund. Those analysts had to be trained to understand the methodology of the index, according to Peter Wahlstrom, the director of technology for Morningstar Equity Research.

"We're the experts covering these companies; we're the experts looking at trends,” said Mr. Wahlstrom.

Mr. Edelman said the allocations his firm will make to the fund will vary between clients. A “moderate-risk” investor might see an allocation of 4% of their invested assets in XT, he said. Overall, however, it's a substantial first client for an iShares product; Mr. Edelman's firm manages more than $13 billion, according to regulatory filings.


Mr. Edelman's regular radio and television appearances cultivate a middle-brow audience often shunned by top financial advisers. In recent years he's used that platform to predict the demise of mutual funds and to highlight the challenges facing active asset management.

He's also warned other financial advisers that their businesses face extinction due to the competitive threat mounted by so-called robo-advisers.

Mr. Edelman's television show, “The Truth About Money with Ric Edelman,” has been sponsored by iShares “from time to time,” according to disclosures he has made to the Securities and Exchange Commission.

Mr. Edelman said there is no conflict of interest because iShares only compensated a third-party firm involved in the show's production and distribution. A BlackRock spokeswoman said the firm does not currently sponsor the show.

BlackRock increasingly launches products with built-in audiences. In 2013, iShares launched four smart-beta funds with a total $400 million from the Arizona State Retirement System. Last year, the iShares MSCI ACWI Low Carbon Target ETF (CRBN) started trading with a multimillion-dollar investment from the United Nations Joint Staff Pension Fund.

And BlackRock is also looking to increase sales of its iShares ETFs among registered investment advisers, Mr. Edelman's peers. In that market, iShares faces tough competition from other money management behemoths such as the Vanguard Group Inc., the fund giant and low-cost evangelist.

BlackRock has courted those independent wealth managers, perhaps most notably through partnership with sometime-competitor Fidelity Investments. Seventy BlackRock ETFs trade on Fidelity's commission-free platform.


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